Alphabet drops as AI demand raises spending questions

Alphabet shares fell more than 3% in after-hours trading Wednesday after the Google parent reported second-quarter revenue above Wall Street expectations but raised its capital spending outlook for artificial intelligence infrastructure. The results underscored a widening trade-off for large technology groups: AI is supporting demand, while the computing capacity needed to serve it is absorbing more cash.

Revenue rose 24% from a year earlier to $119.8 billion, ahead of the $116.9 billion expected by analysts, according to LSEG data cited by CNBC. Alphabet reported earnings per share of $9.11, well above the LSEG consensus of $2.89, but CNBC said the figure included a $99 billion contribution from equity investment gains tied to stakes in SpaceX and Anthropic.

Excluding that investment gain, CNBC estimated Alphabet’s operating earnings at about $2.85 a share, below the LSEG-compiled estimate. Operating income was stronger than expected at $40.77 billion, and the company’s operating margin widened by 1.6 percentage points from a year earlier.

The spending outlook drew particular attention. Alphabet said it now expects 2026 capital expenditure of $195 billion to $205 billion, up from an April forecast of $180 billion to $190 billion. The company said the additional spending is intended to bring AI capacity online faster to meet demand. Executives also reaffirmed that capital expenditure would “increase significantly in 2027,” according to CNBC.

Capital expenditure, or capex, covers long-lived assets such as data centers, servers and custom chips. For AI providers, these investments can expand future revenue capacity, but they also reduce near-term free cash flow when cash outlays rise faster than operating cash generation. CNBC said Alphabet’s quarterly free cash flow has turned negative.

Alphabet also missed expectations in Google Search revenue, CNBC reported, although the segment still grew nearly 17% from a year earlier. The search business remains central to Alphabet’s earnings base, and investors have been assessing whether AI-generated answers inside search results will change advertising monetization over time.

Chief Executive Sundar Pichai said AI features are increasing search activity. He said AI Mode has exceeded 1 billion monthly active users since its global expansion last October. Pichai added that AI features in Search are sending “billions of clicks to websites every week” and said the company reduced the cost of AI Mode responses to the lowest level since launch during the quarter.

Other AI metrics were stronger. CNBC reported that the Gemini app reached 950 million monthly active users, with daily active users tripling from a year earlier. Gemini model application programming interfaces processed about 22 billion tokens per minute, up from more than 16 billion in the previous quarter. Tokens are units of data used by AI models to process text and other inputs.

Google Cloud was a notable growth area. CNBC said the unit’s growth accelerated to 82% year over year from 63% in the first quarter, while backlog rose to $514 billion from $460 billion in the previous quarter. Alphabet also said nearly 90% of Fortune 100 companies use Gemini Enterprise and 90% use Google Cloud Security, according to CNBC.

YouTube advertising also benefited from higher engagement tied to the World Cup. CNBC reported that more than 1.7 billion unique viewers watched World Cup-related content on the platform.

Alphabet’s share price had already weakened from a May 13 record close of $402.62, CNBC reported. Investor concerns have included rising AI investment across large cloud providers, Alphabet’s recent bond and equity financing plans, departures of AI researchers to rivals and delays to a new flagship model.

In June, Alphabet announced an $85 billion fundraising effort, including a $40 billion at-the-market equity offering program expected to begin in the third quarter. The company said the equity sales are primarily intended to meet tax obligations linked to employee equity grants. Chief Financial Officer Anat Ashkenazi said on the earnings call that Alphabet was “not planning to go back to the equity markets,” apart from that at-the-market program, CNBC reported.

This story draws on original reporting from CNBC.